Exam 8: Foreign Currency Derivatives and Swaps

The time value is asymmetric in value as you move away from the strike price.(i.e.,the time value at two cents above the strike price is not necessarily the same as the time value two cents below the strike price.)

Which of the following statements regarding currency futures contracts and forward contracts is NOT true?

Instruction 8.1: For the following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period. ∙ Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%. ∙ Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50% ∙ Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%. -Refer to Instruction 8.1.After the fact,under which set of circumstances would you prefer strategy #3? (Assume your firm is borrowing money.)

A preferred interest rate swap strategy for a firm with variable-rate debt and that expects rates to go up is to

In option valuation,total value is equal to the intrinsic value plus the time value of the option.Define the latter two terms.

Instruction 8.1: For the following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period. ∙ Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%. ∙ Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50% ∙ Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%. -Refer to Instruction 8.1.Which strategy (strategies)will eliminate credit risk?

Other things equal,the price of an option goes up as the volatility of the option decreases.

________ is the possibility that the borrower's creditworthiness is reclassified by the lender at the time of renewing credit.________ is the risk of changes in interest rates charged at the time a financial contract rate is set.

The ________ of an option is the value if the option were to be exercised immediately.It is the options ________ value.

Foreign currency options are available both over-the-counter and on organized exchanges.

Instruction 8.1: For the following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period. ∙ Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%. ∙ Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50% ∙ Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%. -Refer to Instruction 8.1.Choosing strategy #3 will

A call option whose exercise price is less than the spot rate is said to be ________.

TABLE 8.2 Use the information for Polaris Corporation to answer the following question(s). Polaris is taking out a $5,000,000 two-year loan at a variable rate of LIBOR plus 1.00%. The LIBOR rate will be reset each year at an agreed upon date. The current LIBOR rate is 4.00% per year. The loan has an upfront fee of 2.00% -Refer to Table 8.2.If the LIBOR rate falls to 3.00% after the first year what will be the all-in-cost (i.e.the internal rate of return)for Polaris for the entire loan?

The major difference between currency futures and forward contracts is that futures contracts are standardized for ease of trading on an exchange market whereas forward contracts are specialized and tailored to meet the needs of clients.

The price at which an option can be exercised is called the ________.

The value of a European style call option is the sum of two components,the

Instruction 8.1: For the following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period. ∙ Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%. ∙ Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%, to be reset annually. The current LIBOR rate is 3.50% ∙ Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the credit annually. The current one-year rate is 5%. -Refer to Instruction 8.1.The risk of strategy #1 is that interest rates might go down or that your credit rating might improve.The risk of strategy #3 is (Assume your firm is borrowing money.)

The writer of the option is referred to as the seller,and the buyer of the option is referred to as the holder.

The single largest interest rate risk of a firm is ________.

A speculator in the futures market wishing to lock in a price at which they could ________ a foreign currency will ________ a futures contract.